It is understood that a hobbyist algorithmic trader will have a difficult time to compete against professional algorithmic traders in finding market ineffectivities to exploit in the general case. However, I would assume those professional algorithmic traders must target higher-value inefficiences (high liquidity, higher volume) to make it worth their time.

For a hobbyist working with much smaller capital and yield requirements, are there opportunities left over for them to exploit, with the assumption that the professional traders have chosen to not pursue them due to the value of the opportunity being too low for them?

$\begingroup$Professionals are vultures. There is nothing too small to go after. There are always opportunities though. You just gotta be original.$\endgroup$
– amdoptMar 21 '17 at 19:10

$\begingroup$“algo trading” may not necessarily mean arbitrage trading, which is I guess what you meant. You can be ‘algo trader’ by having trading strategy based on EOD data, and still make money with little initial investment$\endgroup$
– rbmMay 10 '17 at 18:26

$\begingroup$@rbm I think he means high-frequency systematic traders. Definition of algo-trading is always blurry between the execution-algos you described and the others.$\endgroup$
– SRKXMay 11 '17 at 22:21

$\begingroup$With algorithmic trading I meant any automated trading in the most general sense (not limited to arbitrage or high-frequency).$\endgroup$
– Markus HallmannMay 11 '17 at 22:32

4 Answers
4

The primary differences between a hobbyist and a professional firm is 1) Transaction costs 2) Access to information.

The first one you can't do anything about, since that relies on cutting-edge hardware or having your firm right next to the stock exchange, so any sort of low-latency/high-frequency trading strategies won't work as it'll be too expensive.

The second one you also can't do anything about, and especially for market-making firms they will have access to more information than you and can come up with more sophisticated strategies.

You can, however, be more creative and think outside the box. Just be aware that there are often "sniffer" algorithms that detect systematic trades (i.e. your algorithm you made in 30 minutes) and capitalize on it.

Having small capital could have advantages, you can move to shallow assets, small caps equities for example, which have high return rate and here using some algorithmic methods could bring an edge, sometimes even tick data based indicators will improve entry points of your system

Higher liquidity instruments typically do have more competition. Low volume equities tend to perform differently intraday due to fewer number of players "controlling" the price. The downside of that is that these few players can also trade against you very effectively.

I would say that a hobbyist systematic trader is very unlikely to perform long-term real returns. There are several reasons for this.

Transaction costs were already mentioned. They decrease with size; if you don't have millions of dollars to play with, you are likely to suffer from them, even more so if you have a high turnover.

By definition, when a strategy works, you exploit it until the price has adjusted. So would other market participants. If you can find something nobody thought about so far, and never disclose it, then you might get some profits... until someone else finds it. It is highly unlikely that you'll on your spare time find something so smart that nobody else can think about it. When they do, profit will shrink or disappear. If you find a strategy in a book, it is publicly available and hence there should not be much profit left for this, even more so with firms who spend their days testing everything around.

Again, I'm not saying it is impossible to make money for a while, but to make it a long-time stream of income is very unlikely. I'm not talking about months here, I'm talking years and decades.